14.02.2024: GST Council may issue clarification on expat salary taxation amid controversy

The Goods and Services Tax (GST) Council may issue a circular to address the controversy surrounding the spate of notices sent to Indian arms of foreign companies seeking to tax salaries paid to expatriates by the local unit.

The circular may clarify that input tax credit should not be held back for the period 2017-2022, as the practice of sending expatriates to the Indian unit, known as secondment, amounts to exports of services, people familiar with the development said on condition of anonymity.

The proposal may be placed before the GST Council once the law committee arrives at a consensus on the issue, they said. The GST Law Committee, comprising officials from states and the Centre, advises the Council on laws, rules, and procedures.

Some of the law committee members are of the view that input tax credit should not be given to MNCs for 2017-22, invoking Section 74, as GST is being recovered late because of acts of suppression by the MNCs. Section 74 of the GST law pertains to the determination of tax evasion and the imposition of penalties in cases where the tax authority finds that a taxpayer has intentionally evaded taxes under GST regulations.

“Centre is keen on issuing a circular in this regard to resolve the issue. The circular may clarify that Section 74 should not be invoked mechanically. It will resolve the issue to a great extent as the MNCs will get ITC for 2017-2022 and will only have to pay the additional interest cost. Some of the members of the law committee, however, are not keen to pursue this approach. The issue may be deferred to the next GST Council meeting till the law committee arrives at a consensus,” the person told Moneycontrol.

In the context of taxation, the act of suppression refers to actions taken by a taxpayer to conceal income, assets, or transactions to evade taxes. Suppression may include under-reporting income, overstating deductions, concealing assets or transactions and misrepresenting facts.

The revenue neutral issue

MNCs regularly send executives to India, where they work for a certain period. These employees are paid in rupees by the Indian subsidiary, and the entire cost is reimbursed by the overseas company. Thus, when secondment salaries are paid by the Indian employers, there is no business expense.

The local arms of MNCs are of the view that the salaries paid by them are outside the scope of GST and only part of the pay package relating to social security—that’s because these expats are usually eligible for social security in their home country—should be under the purview of tax.

However, the GST authorities believe that the entire salary comes under the scope of GST after a Supreme Court ruling of 2022 that said that secondment services are taxable. Thus, from 2022 onwards, MNCs pay GST on expat salaries and take credit for it as it is the export of services. Thus, it is revenue-neutral for the companies and the GST authorities.

But for 2017-2022, interest and penalty have been sought by the GST department. According to reports, the GST authorities have so far recovered Rs 2,500 crore of the tax for this period from the MNCs.

Source: Money Control

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